Married couples had better learn their alphabet as they create estate plans designed to keep assets in the family and away from the tax man. Alphabet-savvy trust planning is particularly important if spouses have different sets of final beneficiaries in mind. 
Many people believe that AB and ABC trusts are a benefit only to the very wealthy, but the truth is, anyone can benefit.  AB and ABC trusts allow a couple to utilize both spouses estate tax exemptions.  In addition, the trusts are irrevocable, so that assets owned by A, B, and C trusts will be:

  • Protected from a divorce settlement in case the widow or widower remarries and later divorces
  • Available to the surviving spouse, yet preserved for the benefit of children
  • Subject to a deferral of estate taxes, which might well be significantly reduced in the future

The AB trust document became a standard estate planning document in the years prior to 1981. The basic goal was to reduce estate tax to zero on the death of the first spouse, leaving the assets available to support the surviving spouse. A second goal was to avoid appreciation in the estate so that there would be little or no tax due on the surviving spouse’s death.

The A trust is known as the Survivor’s Trust, and it holds the assets of the surviving spouse.  The B trust (also known as the Residual Trust, The Credit Shelter Trust, or Bypass Trust) holds the first-to-die spouse’s share of the estate (equal to the estate tax exemption amount).

With the Estate Tax Reform Act of 1981, a new category of trust property was created, namely the C portion of the ABC arrangement.  Also known as a QTIP (Qualified Terminable Interest Property), the trust would provide income to the surviving spouse, but upon the second death, it was fixed in advance who would inherit the assets. The “big deal” about the Bypass Trust is that it is not subject to estate tax when the surviving spouse dies.

What our estate planning attorneys find useful about the ABC arrangement is that, if it is properly structured, assets can pass down two generations without being subject to estate tax – no matter how large that trust grows to be!

The Complete Book of Wills, Estates & Trusts offers an example of a situation where ABC trust planning might be appropriate:

  • John and Mary each have children from a previous marriage.
  • Each wants to provide for the other, but want to be sure their estates will ultimately pass to their own children.
  • If John were to leave his entire estate to Mary, there would be no tax (because she’s his spouse), but later, when she died, there would be tax on the combined amount.
  • The ABC arrangement provides for the survivor’s needs but assures that the final beneficiaries will be both sets of children, while at the same time saving estate tax.

Trusts can be as complex as ABC! 

– by Kimberly Lewis of Rebecca W. Geyer $ Associates